New York Law School authors Davidson and Santorelli in their March 2013 research, Evaluating the Rationales for Government-Owned Broadband Networks, looked at five common rationales offered by municipal broadband advocates for government ownership and entry broadband service delivery. In this post we look at their “smart community-economic development rationale.”

This argument for more government says that communities need broadband networks in order to be “smart” communities and therefore attractive to investment and job creating economic development. Their “fundamental flaw”, say the authors,

is the assumption that the public sector is better positioned than the private sector to provide the sort of Internet connectivity that is needed to continue driving investment and innovation in the broadband ecosystem. The notion that broadband is the foundation for the 21st century economy is widely accepted, as is the fact that high-speed Internet connectivity is disrupting important sectors of the economy like education, energy, and healthcare. But the argument that cities are better equipped to spearhead such a fundamental economic and social shift in the United States simply fails.

They footnoted their earlier discussion about the growth of private sector-provided broadband — both its availability and its capacity — over the last decade in the U.S. The incumbent providers haven’t been sitting idle:

…the tremendous growth in broadband availability and variety has been fueled by significant investment in networks on the part of service providers. Broadband ISPs invested over $1 trillion in their networks [that’s $1,000,000 million] between 1996 and 2010. In 2011 alone, service providers invested $66 billion — $13 billion by cable, $25 billion by wireless, and the remainder by telecommunications companies.

And this extraordinary level of investment has resulted in:

96.5 percent of housing units in the U.S. [having] access to at least one wireline broadband provider in June 2012, while less than one percent of the population lacked access to a wireless broadband provider [that’s the same as more than 99 percent of the population having access to wireless]…Nationally, over 1,600 different companies currently provide broadband Internet access service, up from just 130 in 2000.

The authors then outline the opportunities for all levels of government to support better broadband access. The federal government can provide seed funding or regulatory support, states can remove legal, regulatory and policy barriers, and local governments can leverage economic incentives that promote private sector entry and competition, they say. But, they caution,

these roles should be limited lest they skew or undermine the market forces that are shaping and reshaping the broadband ecosystem daily.

Most of the communities that have invested in broadband have only afforded to do so on the strength of outside funding. Their study offers the Chattanooga experience as an example, which received $111 million federal grants.

In my experience the initial capital to pay for a government fiber build can come from only one of three sources:

a community’s utility ratepayers;

a community’s taxpayers and their children (through loans and bonded indebtedness);

state or federal grants.

So, we essentially have governments taking money from their taxpayers, their utility ratepayers, or their children to subsidize an attempt to compete against the already highly competitive, highly capitalized, extremely volatile, and rapidly evolving telecommunications-broadband sector. Marvelous.

Here in Washington one local PUD spent more than $100 million of its electric ratepayers’ cash reserves to build a fiber system. A neighboring PUD spent nearly double that amount — all from their respective ratepayers. They both promised that future fiber revenues would eventually grow and be used to repay electric ratepayers. But that’s not possible when fiber revenues are insufficient (even 10 years hence) to cover operations, much less to repay their initial capital investment. Both of these utilities have walked away from any thought of repayment.

I’ve written in several places about the source of funding for these systems and how to follow the money. Go here and here for a closer look at two examples in Washington State.

Set aside for the moment that this is probably one of the better outcomes for Provo residents in the long run, given the mistake that got them into this mess in the first place. Let’s ponder for now these questions:

Where is the public accountability for spending decisions in the hundreds of millions of dollars?

When asked why they vote to approve spending the public’s money this way, is it good enough for lawmakers to say essentially, ‘because we can?’

In Provo’s case, did the incumbent providers have an opportunity to negotiate a similar deal for city’s bargain-priced fiber system?

What signal is sent to potential investors and job creators when a community demonstrates to everyone that it is willing to place the heavy foot of government preference on the scales of competition? What is smart or reasonable about that?

And, why should any private firm be able to enter an existing private marketplace and essentially be given $39 million worth of taxpayer-subsidized capital facilities with which to jump-start their effort?

The authors conclude,

the claims that the mere presence of a government-owned broadband network will automatically spur business formation and somehow conjure a Silicon Valley-type environment is naive at best and deceptive at worst.

Well, I get their point, but I can easily conjure worse when considering the hundreds of millions of dollars of other people’s money that are being squandered across the country by some of our public officials.

Tomorrow we discuss the fifth and final rationale evaluated by our authors, “the local self-reliance rationale.”